Cyrela Brazil Realty SA Empreendimentos e Participacoes

BOVESPA:CYRE3

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to Cyrela Brazil Realty Conference Call, where we will discuss the second quarter of 2018 earnings results. [Operator Instructions] As a reminder, this conference is being recorded and the audio will be available at the company's website at www.cyrela.com.br/ri.

This call is being simultaneously translated into English and is being broadcast over the Internet. Questions can also be asked by participants connected abroad.

The earnings release published yesterday, August 9, after the close of the D-Street trading session can also be accessed on the company's website.

Before proceeding, we would like to mention that the forward-looking statements that may be made during this conference call related to the company's business prospects and forecasts as well as operating targets related to its financial growth potential are predictions based on management's expectations about the future of Cyrela. These expectations are highly dependent on domestic market conditions, the general economic performance of the country and international markets, and therefore, are subject to change.

With us today are Mr. Efraim Horn, Co-CEO; and Mr. Paulo Eduardo Gonçalves, Investor Relations and Structured Finance Officer.

I will now turn the conference over to Mr. Efraim Horn. Mr. Horn, you may now begin.

[Efraim Horn, executive]

Good morning. The second quarter of the year was marked by an increase in uncertainties regarding the recovery of the economics activity. The truckers' strike that took place in May had an impact on the entire production chain and the debate about the elections added even more concern and caution to the domestic scenario. Our industry was also impacted by the World Cup and also by the temporary suspension of the protocol rights for products launched in the city of São Paulo. Despite the adverse scenario, sales in the quarter totaled BRL 1.1 billion, 40% higher year-on-year. The Minha Casa Minha Vida segment had a large participation in those numbers. The amount of cancellations dropped and the most recent development had a great performance.

Another good news is the fact that the legal dispute regarding the protocol rights in São Paulo came to an end, which makes us optimistic about the products launched in the second half of the year. We will launch 16 new products: 3 in the South, 3 in Rio de Janeiro and 10 in São Paulo. They are great high-end and medium-range projects located in the main neighborhood of their cities. Thus, we will reach our target level for our launches.

Our focus in the second half of the year, besides selling our finished units, is to make these new products a success. The highlight of the quarter was, again, the company's strong cash generation, which totaled BRL 181 million. Additionally, we have virtually completed our entire funding plan for the year as estimated in late 2017. Depending on our cash generation in the second half of the year, we will discuss a new dividend distribution later this year.

Now we will comment on our operating results. On Slide 5, we'll address Cyrela's launches. In 2Q '18, we launched BRL 981 million, 53% more year-on-year. In 2Q '18, launches amounted to BRL 1.4 billion, a 13% growth year-on-year. We launched 12 new products in 2Q '18: 8 in the city of São Paulo, 2 in Rio de Janeiro, 1 in the South and 1 in the city of Campinas. 8 of them are in the Minha Casa Minha Vida housing program, 2 are medium range and other 2 are high-end products. And we did not launch other high-end products in São Paulo due to the protocol rights that we already mentioned. Excluding swaps, the volume launched in Cyrela's share in 2Q '18 was BRL 856 million, down by 12% year-on-year. The company's share in the volume launch in 2Q '18 was 65% compared to 70% year-on-year.

On Slide 6, we highlight 2 launches. One is Living Privilège in São Paulo, which was over 70% sold in the quarter, and the other one is in Campinas, Living Elegance, which has been 50% sold in the month it was launched.

On Slide 7, we will talk about our sales performance. In 2Q '18, presales were BRL 1,060,000,000, 50% higher -- actually, 40% higher than the BRL 750 million in 2Q '17. In the first half of the year, sales totaled BRL 1.7 billion, a 31% growth year-on-year. Excluding swaps, presales amounted to BRL 1,050,000,000 in Cyrela's share, a 13% increase year-on-year. The cities of São Paulo and Rio de Janeiro jointly accounted for 92% of sales in the quarter.

On Slide 8, we will address sales speed. The company's annual SoS was 37.9%. Looking at sales speed by period, projects launched in 2Q '18 have been on average 50% sold, which is very good because by the end of the year, that percentage will increase very much.

On Slide 9, we will address Cyrela's total inventories. At the end of the quarter, inventory at market value totaled BRL 5.8 billion, down by 2% quarter-on-quarter. The change in our inventory can be seen on the right.

On Slide 10, you can see a breakdown of our finished units. In 2Q '18, we sold 7% of the finished units at the beginning of the period. Adding the inventory of projects delivered in 2Q '18 along the quarter and pricing of units and market value, finished units inventory increased by 20% quarter-on-quarter. We are aware of how important this matter is to the company, and we will continue to focus our efforts on these products. Rio and the Northeast Region account for 42% of the finished units.

On Slide 11, we will talk about delivered units. In 2Q '18, Cyrela delivered 17 projects, totaling 5,100 units. In the first half of the year, we delivered 8,300 units in 30 projects. The units delivered account for a PSV of BRL 2,150,000,000, 113% higher quarter-on-quarter.

I will turn the floor over to Paulo, who will present our financial results.

[Paulo Gonçalves, executive]

Thank you, Efraim. Good morning. On Slide 13, we'll present our financial results. Gross revenue was BRL 658 million in the quarter, up by 42% quarter-on-quarter and 11% higher year-on-year. This increase was mainly due to higher net sales, and the recognition of launches. In the first half of the year, gross revenue was BRL 1.1 billion, down by 10% year-on-year. Sales income in the quarter was BRL 171 million, up by 37% quarter-on-quarter and 12% higher in the year-on-year comparison.

Year-to-date, gross income reached BRL 296 million, 16% lower year-on-year. The company's gross margin in the quarter was 26.8%, 0.9 percentage points lower than the 27.7% from the previous quarter. The reduction in our margin in this quarter is mainly due to the lower margins of the new sales in our product mix. In 2Q '18, the results were affected by extraordinary items, such as the cancellation of the purchase of a land plot in the South, new contingencies and reserve costs in the Northeast. Therefore, we had losses amounting to BRL 28 million. In the first half of the year, losses totaled BRL 80 million compared to losses of BRL 137 million in the first half of 2017.

Please go to Slide 14 to see our profitability. In 2Q '18, our return on equity measured as the net income over the past 12 months over the average shareholders' equity was negative 0.7%, and our EPS was negative BRL 0.07 per share.

On Slide 15, we'll talk about our customers' financial solutions. In 2Q '18, transfers, trust of deeds and payoffs amounted to BRL 940 million, 27% higher quarter-on-quarter and also in the year-on-year comparison. Considering units, transfers of deeds -- transfers, trust of deeds and payoffs totaled 5,300 units, 23% higher quarter-on-quarter and 29% (sic) [ 39% ] higher year-on-year.

Slide 16 shows the company's cash generation. In 2Q '18, our cash generation was BRL 181 million versus BRL 182 million quarter-on-quarter. Year to date, our cash generation was BRL 363 million, up by 80% in comparison with BRL 202 million we had last year in the same period.

On Slide 17, we can see our debt. Gross debt at the end of the quarter was BRL 2.4 billion. The cash position was BRL 1.5 billion. Thus, our net debt was BRL 0.8 billion. 45% of the total gross debts are related to loans for construction and 55% are long term. We have virtually completed the entire funding plan for the year as estimated in late 2017, with the following operations: We issued certificates of real estate receivables in the amount of BRL 300 million with a term to maturity of 49 months, we also issued real estate credit notes amounting to BRL 300 million with a term to maturity of 4 years, and we issued debentures in early July in the amount of BRL 150 million with a 2-year term to maturity. Our net debt to equity ratio was 14.4%, 2.4 percentage points lower quarter-on-quarter. The low debt level confirms Cyrela's financial solidity and full-fledged position to adjust our capital structure and improve returns to shareholders.

We will now begin the question and answer session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Enrico Trotta with Itau BBA.

[Enrico Trotta, analyst]

I have 2 questions. The first one is about finished units. Your performance was good in comparison with the first quarter with an increase of 20%, which can be explained by the delivery that you had. Now looking forward and imagining that we are going to have deliveries that are going to actually drop from now on, what is going to be the scenario for finished units? Is it going to go down? And also, I would like to know more details about how you are going sell finished units after the second quarter. I would also like to know some details about cash generation. The second question is about your pipeline for launches in the quarter and what you expect for the second half of the year, since you don't have the protocol -- you don't have that protocol rights claim ending anymore? And I would like to know more about the projects that you intend to launch in the third and fourth quarter. And also your opinion about the demand because we have a lot of uncertainty around the elections.

[Efraim Horn, executive]

Enrico, this is Efraim. You asked us about finished units, if it's going to go down or if we're not going to be able to sell them. We believe that we have reached the peak of finished units in July and June. We delivered projects in December and November 2017. And in the last quarter, all of them were finished units, and we were not able to sell that -- the amount of finished units from November and December through June and July because we would have to -- have sales to finish selling the finished units that we have. And now we are able to have special sales and promotions to bring the number down. In June and July, we had some sales and promotions of finished units and those units were delivered in December and November, and they were blocked before that. And those finished units are now going to drop a lot. And we are not going to have any other new deliveries. We are only going to have new launches now. So there is only one way for finished units, and that is down.

Now in the next quarters, we are feeling a sort of a decompression after the second quarter. We have been working hard for 2 years now to purchase land plots in São Paulo, in Rio and in the South. We can adjust the price of the products, but we are living through a crisis right now. Unfortunately, we were not be able to launch any products here in São Paulo. We have many projects to be launched along the year in São Paulo, but we have to do that and postpone that to the second half of the year only. But now we are going to be able to really launch them and start building them.

We are not scared of the elections for one reason, we are not launching products for speculation, and they are not very big. We have already purchased those products thinking that we are going through a crisis. So it really doesn't matter what happens in the economic scenario from now on. Of course, we have to be careful about our strategy in terms of price and product, but I believe that we have done our homework already. Now we are going to launch these 16 projects that we mentioned before not concerned about the specifics of these projects in terms of the elections.

[Operator]

The next question comes from Luis Stacchini with Crédit Suisse.

[Luis Stacchini, analyst]

I also have 2 questions. The first one is about credit. What do you think about the appetite of the banks to provide credit? We had some changes for 2019, but I would like to know if you think that we are going to have improvements in saving accounts. So I'd like to know if you have seen any improvement whatsoever in credit. I'm not asking specifically about the rates and the fees, but are there strategies to increase the credit for purchasing real estate? Because I know that we are not going to see so many transfers anymore. So I would like to understand more details about that. And the second question is about the dividend distribution. Many candidates are thinking about taxing dividends to increase the amount that the government collects from taxes. So I'd like to know what you think about that, and what can you do to avoid that sort of impact. Do you intend to return to a larger level in terms of the equity value of the company?

[Paulo Gonçalves, executive]

This is Paulo. I'm going to answer your 2 questions. The first one was about credits. In the beginning of the year, banks are now more aggressive. And they are becoming more aggressive now when it comes to credits to individuals. We still think that we have room to decrease interests. But when it comes to restrictions, for example, in some cases, banks are less restrictive, we are able to have more transfers than what we had last year and in the beginning of this year. Now when it comes to the resolution of the monetary council, we had improvements in savings accounts. We believe that, that is going to be very positive, but only in the long term. I believe that is going to happen in 6 years' time. In some cases, it will be linear, but I'm sure that this is very positive for our industry.

Now when it comes to your question about taxing dividends, we have been talking a lot about this issue here in Cyrela. We are paying attention to what is happening but there are a lot of uncertainties here. We don't know if that tax is going to incur on the accumulated growth or our future profit, and that is very relevant for Cyrela. I am sure that we are going to pursue the better tax efficiency that we can.

[Operator]

The next question comes from Luiz Mauricio Garcia with Bradesco.

[Luiz Garcia, analyst]

I have 2 questions. The first one is about contingencies. This is 1 point in Cyrela's results that are still high. I know it is very difficult. There are always new factors that make things harder to predict. But I believe that there are 2 main points here in this topic. The first one is what you expect considering that there are many surprises that arise from time to time. And the second one is what have you been doing to try and be more proactive to reduce those risks? The other point is about gross margins. Are you going to have a new strategy for selling finished units? You said that you're going to have some promotions, but some launches have higher gross margins. So how are you going to balance that? How are you going to balance the gross margin with the discounts that you're going to have? Is it going to go down? Is it going to go up? What do you expect since you're going to have some discounts in order to lower the number of finished units?

[Paulo Gonçalves, executive]

This is Paulo. As you well said, it is very hard for us to predict contingencies. We went through some turmoil last year, and we still have to deal with the impact of that. We can see a trend to lower the finished units because -- and the contingencies, because we are not building any new products right now. It's been a while that we have been strengthening our legal team to fight the excess of contingencies that we have, but that's just part of our business. The main point here is that we have a trend. We can see a trend to lower the amount of contingencies.

The recent launches, especially last year and this year, they have higher margins. What you say is exactly in line with what happened this quarter. We have been working with higher margins in some products, but some products need lower margins. And the result is very volatile. So the effects of sales have larger impact when you look at the gross margin. Now looking forward, since we are going to decrease the number of finished units, we believe that the margin is going to start growing not significantly, but gradually.

[Luiz Garcia, analyst]

Even now that you're going to make an effort to decrease the number of finished units. Even so, are you going to be able to increase gross margin?

[Efraim Horn, executive]

This is Efraim. I'm going to share with you some news, and it is actually a reality that we can see in the country right now. When you deliver a new building, around 120 days before it is delivered and until 5 months after it is delivered, it's not that we cannot give any discounts. We can't do it because the sales that we had 8 months before it was delivered, they are going to be in the same price. So I don't believe that we are going to have a reduction of the gross margin after we have the new launches. I don't know if you understand the system. So the problem is that we cannot lower the prices and change the margin, because we have to use the same prices that we had before the launch. Now we are going to have more organic launches, so the gross margin tends to go up.

[Operator]

The next question comes from Gustavo Cambauva with BTG Pactual.

[Gustavo Cambauva, analyst]

I would like to talk about the deliveries that you had in the second quarter and know more details about what is going to happen in the number of cancellations moving forward. You said that you reached the peak of finished units in the second quarter. But do you believe that the products that were delivered in 2Q '17, do you think that you're going to have many cancellations or you don't have that risk because those units have not been sold yet? And also, I would like to know what is your expectation in terms of cancellations in the next 12 months?

[Paulo Gonçalves, executive]

Hello, this is Paulo. When it comes to cancellations, we are going to have a lower delivery level. So if you deliver less, you have fewer cancellations as well, but the conditions are better. The price stops dropping for a while now. The credit conditions, as we said to Luis, are improving. So our expectation is that we are going to see some drops in the number of cancellations. Last year, we had BRL 1.8 billion in cancellations, and for this year, I believe that it's going to be around BRL 1 billion. It is a very significant reduction.

[Operator]

Next question comes from Jorel Guilloty with Morgan Stanley.

[Wilfredo Guilloty, analyst]

I have 2 questions. Do you see any differences in the demand for finished units and new units? Do you have more people interested in finished units due to credit or prices? And the second question is about the new launches. Do you believe that we are going to have a strong increase in the new units in medium range and high end? Do you think that the competition is going to be very tough from the new -- the other competitors?

[Efraim Horn, executive]

Hello, this is Efraim. This is a very difficult question to answer. We had new launches in São Paulo. And the finished units tend to be sold more slowly. And that happens because there are many finished units. If you have finished -- if you have 300 finished units, it is going to take a year to sell them all. So it really depends on the number of finished units that you have. Now the launches are not related to demand. We had terrible launches in São Paulo. So it's not really about the general demand. It is more about getting the products right in terms of location and price and having a lower volume of units.

And your second question was about the competition in São Paulo, right?

[Wilfredo Guilloty, analyst]

Yes. Do you believe the competition is going to get tougher in the second half of the year? Do you believe that the competitors are going to launch more products in the high end and medium range?

[Efraim Horn, executive]

The question -- the answer is yes, because the competitors could not launch anything in the first half. So they are going to do it in the second half. And the competitors are more similar now even when it comes to the size of the units and the type of product. We have many competitors, of course, but our obligation as a company is to predict the opportunities that we have and making those opportunities free of competition. So we are launching products with many others developments all around it, but the type of the product is different so that we don't have that competition. We are trying to escape the competition by having a smart strategy when it comes to the type of product.

[Operator]

Next question comes from Renan Manda with Santander.

[Renan Manda, analyst]

I have 2 questions. The first one is related to the launch of the Vida brand. I would like to know more about the rationale behind this new unit, this new brand. And I would like to know about the location where you're going to work with this brand, the type of projects that you're going to develop. And I also would like to know the difference between the new brand, and Plano & Plano and Cury. The second question is about that effect of the injunction. The process of approvals by the municipality of São Paulo takes a while, right? So I would like to know if those projects that were in the old plan are now being approved by the municipality of São Paulo? So I know -- I understand the risk for launches in the second half of the year.

[Unknown Executive]

Our position and the position of many other companies as well has been -- being prepared for the new plan of the city of São Paulo that allows for the construction of Minha Casa Minha Vida projects in land plots that have already been purchased. We have some land plots in which we can develop Minha Casa Minha Vida project. We are developing those projects in our joint ventures, and we actually want to increase the launch volume in that program -- Minha Casa Minha Vida program. Because now, you can find those projects in good locations in the city of São Paulo. The new plan of the municipality of São Paulo allows us to increase that volume. Now since Cyrela does not have a brand to work in that segment, and we didn't want to use an existing brand, we decided to create a new brand to use those land plots that are right in the middle of the city that are in great location, using our methodology as possible in each neighborhood in the city of São Paulo. And now our intention is to be here in São Paulo and not smaller cities in those projects in the Minha Casa Minha Vida segment.

And the second question was about the city plan. Now that the protocol rights fight has ended, the municipality of São Paulo started approving the projects, 5 of them have been approved already and one of them has already been launched. And this weekend, we are going to have 3 other

[Audio Gap]

in August. We are going to have one in the South as well and one in Rio. So the scenario is normal. And we are going very well.

[Operator]

[Operator Instructions] The next question comes from Marcelo Motta with JP Morgan.

[Marcelo Motta, analyst]

I have 2 quick questions. The first one is about launches. We can see that the company is focused on Minha Casa Minha Vida program and medium-range products. Do you believe that, that is going to be the trend for the rest of the year? Or if we are going to have more high-end and medium-range products in the second half of the year? And the second question is about dividends. In the presentation, you said that you intend to pay additional dividends until the end of the year. We had BRL 200 million already. So you believe that the dividend distribution is going to be in line with the cash generation in the second half of the year?

[Unknown Executive]

You asked about the launches mix. I believe that we have a high concentration in lower-end products because of one reason. São Paulo did not allow us to launch the Living and Cyrela projects in the first half of the year. Now in the second half of the year, we are going to launch 10 projects in São Paulo and over 90% of those launches are in the high-end and medium-range segments. And we are also going to have Minha Casa Minha Vida as well. And in the coming quarters, we are going to decrease the number of Minha Casa Minha Vida products considering the whole mix of products.

Now answering your second question about the dividend. So far everything is in line with what we have planned. In the beginning of the year, we said that we have 2 challenges, cash generation and combined with our funding plan. Now with the 3 debts that we acquired in the second half, we completed the funding plan that we had for the year. So it is very likely for us to approve a second dividend distribution in this year.

[Operator]

[Operator Instructions] There are no more questions. I would like to turn the floor over to Mr. Horn for his remarks.

[Efraim Horn, executive]

So thank you. We are very optimistic for the second half of the year. We are not concerned about the elections because now we can put our plans in action in the market. We were very upset in the first half of the year because we did not have launches here in São Paulo and that has an impact on our results, of course. But now we are going to go back to our targets. We are going to improve the margins of the company and keep Cyrela growing and improving the margins. So thank you very much. Have a good day.

[Operator]

That concludes Cyrela's conference call for today. Thank you very much for your participation.